U.S. Treasury Secretary Timothy Geithner welcomed New Delhi's new-found appetite for economic reform on Tuesday, barely three months after Washington had voiced concern about India's deteriorating investment climate.
Hailing the latest reforms as "significant", Geithner told a news conference with Indian Finance Minister P. Chidambaram in New Delhi that the policies offered "a very promising path to improving growth outcomes for the Indian economy".
India's economic growth has slowed to its lowest in nearly three years and earlier on Tuesday the International Monetary Fund (IMF) sharply cut its projection for GDP growth to 4.9 percent in 2012, one of the lowest official forecasts so far.
"The recent reforms advanced by Prime Minister (Manmohan) Singh and Minister Chidambaram will help provide a foundation for stronger economic growth, an increase in investment, and more widespread gains in income," Geithner said.
Regulatory uncertainty and policy gridlock have battered foreign corporate investment towards India over the past year, adding to dramatic slowdown in growth.Foreign direct investment into India has fallen 67 percent since the start of the 2012/13 fiscal year in April after a record high the previous year, and investors pulled $1.93 billion from India in the second quarter, helping send the rupee to a record low.
In an interview in July, U.S. President Barack Obama said India prohibited foreign investment in too many sectors, adding there appeared to be a growing consensus in India that the time was right for a new wave of reforms.
India has traditionally been sensitive to criticism from the United States, an ally but one that is viewed by some in New Delhi with suspicion.
Chidambaram, whose appointment as finance minister in August helped trigger the reforms, said that because India was "deeply locked into the global economy" he had raised the U.S. Federal Reserve's latest round of quantitative easing with Geithner.
"I raised the concern that it may impact commodity prices and commodity prices may rise," Chidambaram said. "There is also of course a beneficial side. Some of that money may come to India as investments. But we need to balance both the advantages and disadvantages."
Chidambaram added that it was too early to conclude what the impact of this latest round of easing, known as QE3, would be.
Under QE3 the Federal Reserve will buy bonds backed by housing mortgages to lower interest rates and boost the economy.
Geithner said he and Chidambaram discussed how U.S. business could contribute to India's infrastructure and investment needs, and improving coordination on bilateral tax matters.
Foreign investors were rattled this year by proposals to crack down on tax evasion, including levying tax retroactively on foreigners. They were ultimately postponed for a year after they spurred an exodus of funds and battered the rupee.
The reforms announced over the past month have included raising the price of subsidised fuel to rein in the budget deficit, opening the retail sector to foreign supermarkets and raising the bar on foreign investment in airlines.
Although the reforms triggered the exit of an ally from the ruling coalition, reducing Prime Minister Singh's government to a parliamentary minority, they have cheered investors.
The BSE Sensex has risen 4.3 percent since September 13 and is up 9 percent since Chidambaram's appointment at the beginning of August.
The greatest challenge facing Singh, however, is curbing a deficit that a government panel warned last month had taken the country to a "fiscal precipice" and could hit 6.1 percent of GDP this fiscal year.